Hynix Could Outshine Its Rivals
As Productivity, Pricing Improve
By IN-SOO NAM
February 27, 2007
SEOUL, South Korea -- A fall in prices of computer-memory chips that was sharper than expected in recent weeks has pounded Hynix Semiconductor and its global peers, pulling their shares down to multimonth lows.
But Hynix, the world's second-largest maker of dynamic-random-access-memory chips by revenue, is likely to regain the lost ground and outshine rivals this year, thanks to improved productivity and competitive pricing.
Analysts and fund managers say Hynix's current stock price is at an attractive buying level as the company is expected to post another year of record profit, propelled by cost cuts and shipment growth.
"Hynix is one of the top-tier chip makers in terms of efficiency and process technology, which should help it weather [the drop in memory-chip prices] and thus is our top pick at current price levels," says Hyung Min Nam, a fund manager at IBK SG Asset Management in Seoul, which holds shares in the company. "Its beaten-down stock price is overdone and unjustifiable."
Despite strong fourth-quarter earnings, Hynix fell to a seven-month low on Feb. 12, largely on concerns about more falls in memory-chip prices in coming months. The stock has shed 11% so far this year, underperforming the broader market's 2.5% rise. Over the same period, its more diversified crosstown rival Samsung Electronics has shed 4.9%.
The average spot price of the benchmark DRAM chip has skidded about 30% so far this year, according to Taiwan-based DRAMeXchange, an online chip clearinghouse. The average spot price of a four-gigabit NAND flash-memory chip has plunged around 38% so far this year.
U.S. market researcher iSuppli expects the prices of DRAM chips, mainly used in personal computers, to fall more than 15% on average in the first quarter from the previous quarter. It predicts a 30% decline, also over the fourth quarter of 2006, in the prices of NAND flash-memory chips, which are used to store data in music players and digital cameras.
"With its proven ability to reduce costs, Hynix will post the most stable earnings performance in the chip industry," said An Seong Ho, an analyst at Hannuri Investment & Securities. "Its high growth in DRAM shipment and low sales share of NAND flash will shield it from weak chip prices in the first half."
NAND flash-memory chips account for less than 20% of Hynix's sales.
Hynix will likely make up for the expected 35% fall of its average DRAM selling prices this year by raising its DRAM chip shipments by 86%, according to Kiwoom Securities' Sung In Kim.
In the fourth-quarter of 2006, Hynix posted a record net profit of 1.015 trillion won ($1.08 billion) on strong sales of its mainstay DRAM chips as the company cut costs through a fast migration to advanced 80-nanometer process technology, which improves productivity by more than 50% from 90-nanometer technology.
Hynix's operating-profit margin in the fourth quarter was 33%, beating a margin of 31% at Samsung's chip-making unit. Samsung, which also makes cellphones and flat panels, posted an overall profit margin of 13% in the fourth quarter.
Hynix, which already produces more than half of its DRAM chips with 80-nanometer technology, is scheduled to shift to 66-nanometer technology in the second quarter, ahead of its rivals. Samsung, which is on a similar migration path, plans to adopt 68-nanometer technology in the first half of the year.
"The technology gap between Hynix and its rivals will widen this year when companies like Germany's Qimonda are still struggling to adopt 80-nanotechnology," says Kiwoom's Mr. Kim. "Even industry leader Samsung is behind Hynix in successfully adopting advanced technology in mass-production."
Hynix's operating profit is expected to grow 16% to a record 2.13 trillion won this year, helped by fatter margins at its DRAM business as a result of cost cuts, Mr. Kim said. He forecasts the company will cut costs 30% this year, compared with his estimate of about 23% in 2006.
The average six-month target price for Hynix shares is 48,160 won, based on five analysts surveyed by Dow Jones Newswires. That is 48% above the stock's closing price of 32,600 won yesterday.
The stock is trading at about 6.6 times forecast 2007 earnings. Analysts say that is a lower multiple than the company's international competitors, including Samsung Electronics, which trades at 9.3 times expected 2007 earnings.
Fans of Hynix also note that concerns about any pressure on the share price from a possible sale of as much as 4% of the company by creditors have eased because investors now think the entire amount won't be sold at the same time.
Some 18 million shares held by creditors, which include banks and institutional investors, were freed up for sale in January and could be offered either as a whole or in tranches, a Hynix executive said last month. Creditors, which bailed out the company in 2001, held about 40% of the company at the end of last year.
"State-run banks, which own a 1.2% stake, have said they're unlikely to sell any time soon," says Myung Sub Song, an analyst at CJ Investment & Securities. "The remaining 2.8%, or 12.7 million shares, won't affect share prices much either, unless they come out to the market all at the same time, which is unlikely." The brokerage firm doesn't own Hynix shares or provide the firm with investment-banking services.
Still, some cast doubts on the industry outlook, citing the continued fall in chip prices while supply continues to grow.
"The chip industry is clouded with uncertainties and the visibility is still low," says Sung Wook Kim, a fund manager at Nonghyup CA Asset Management in Seoul. "For long-term investors, Hynix is a good buy, but apparently now is not the prime time to buy into semiconductor shares. You need to wait for a little while for a clear sign of price stabilization to appear." Nonghyup's Mr. Kim owns Hynix shares.
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